Why Jumping Off the Fiscal Cliff May Be Best Bet

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The very notion of a “fiscal cliff” suggests that the country is approaching a calamitous drop-off at the end of the year — and it would be tantamount to suicide to jump off.

But a contingent of policy wonks and Democrats insist that letting the Dec. 31 deadline come and go — thus triggering automatic tax increases and spending cuts — could produce the best outcome for the country. Once the tax hikes have kicked in, the reasoning goes, Republicans would be hard-pressed to roll them all back and would have to accept a deal on taming the deficit that contains more new tax revenue than GOP lawmakers want.

So some policy analysts and legislators say they are willing to go over the brink — and some are even gunning for Congress to do it.

Call them the cliff-divers.

“It will be much easier to negotiate a budget deal going over the cliff,” said William Gale, an economist at the Brookings Institute and former adviser to George H.W. Bush. “It seems to be the only way we can boost revenues.”

“The willingness to go over the cliff is a means to force a deal,” said Matt McAlvanah, a spokesman for Sen. Patty Murray, the fourth-ranking Democrat. In July, Murray said she would rather push the debt debate into next year rather than reach a deal “that throws middle class families under the bus.”

Publicly, most Democrats haven’t gone as far as Murray, continuing to stress that avoiding the fiscal cliff is their priority. But privately, some acknowledge that they’d be willing to jump if Republicans refuse to let Bush-era tax cuts on the wealthy expire. GOP leaders have vowed to preserve the Bush tax cuts for the top income brackets and everyone else.

Other prominent cliff-divers include MSNBC cable host and former Senate Finance Committee chief of staff Lawrence O’Donnell, who’s launched an “Off the Cliff” campaign to press Democrats to jump; and Robert Greenstein, president of the Center of Budget and Policy Priorities, who says going over could be the “least bad” option.

”I wouldn’t say it’s desirable, but it may be necessary,” explains former White House budget director Peter Orszag, who believes that going past the Dec. 31 could produce the best policy outcome in the face of a political stand-off.

In an ideal world, these figures would want Congress to reach a reasonable deal before the deadline. But they are skeptical that will happen, given the politics surrounding the fiscal cliff, and argue that going over the cliff would remove what they believe is the biggest stumbling block.

Since individual tax rates would go up automatically — rising from 33 to 39.6 percent for the highest-income bracket and 10 to 15 percent for the lowest — Congress would technically be voting to cut them rather than raise them. It’s a distinction that the cliff-divers believe will make all the difference. “Republicans won’t have to violate their ‘no new taxes’ pledge,” says Gale. “The politics are a lot easier and the incentives are a lot stronger.”

President Obama, for his part, promised to veto any legislation that kept the cuts for the wealthy intact.

The cliff-divers don’t deny that the fiscal cliff would deal a serious blow to the economy, knocking the U.S. back into a recession if the spending cuts and tax hikes remain in effect for all of next year. But these advocates say the immediate risk is overblown.

The CBPP points out that most of the changes under the cliff would be phased in gradually, preferring the term “fiscal slope” to counter the notion of an immediate economic apocalypse. The group points out that some of the tax and spending changes could be reversed retroactively, and the Treasury Department also has discretion to stave off changes to withholding tables for payroll taxes.

“If not as though we reach January 2 without having addressed the cliff, and we’re in a recession,” said Josh Bivens, research and policy director of the Economic Policy Institute. The cliff-divers worry, moreover, that rushing to meet fiscal cliff deadline at all costs could convince Congress to accept a subpar deal.

“People talk about a grand bargain — a short-term stimulus and long-term deficit reduction when the economy is stronger — that’s the gold standard, and you don’t get that from panicking prior to January 1,” said Chad Stone, an economist at the CBPP.

Making a hasty deal could involved undesirable trade-offs, for instance changes to Social Security, Medicare and Medicaid that that these advocates oppose.

They also warn against a short-term fix of “extending everything for a little while, then revisiting the issue later,” as Stone put it. Doing so would forgo an opportunity to force Congress into making tough choices, they say, encouraging them to continue an undesirable status quo on taxes.

While they don’t think Dec. 31 is a drop-dead deadline, the cliff-divers also don’t believe that Congress has all the time in the world: They say Congress has a few weeks, at most, to work out a deal before the fiscal cliff starts to do real harm to the economy and the markets. “We won’t go over the fiscal cliff for very long,” concluded Gale.

Critics of the cliff-divers, however, argue they are being too sanguine about passing the Dec 31. deadline and doubt Congress would come together as quickly in early 2013 in such an environment of political brinksmanship. “It strikes me as a bit of a blase attitude — ’We have an airbag, we’ll sprout wings,’” said Michael Hanson, chief U.S. economist for Bank of America Merrill Lynch Global Research.

Hanson predicts it will actually take much longer than the cliff-divers imagine to come to a deal if we pass the deadline. And by that point, significant damage would be done to growth, the stock markets, and consumer and business confidence. “It definitely increases the chance of having one quarter if not two of negative growth,” he said.